– Broc Romanek, CompensationStandards.com

In this podcast, Christina Young and Sandra Pace of Steven Hall & Partners discuss how setting executive pay in the non-profit world differs from doing so for public companies, including:

– How do non-profit boards set pay compared to public company boards?
– What are some of the challenges non-profit boards face in developing peer groups in order to gather comparable compensation data?
– What practice pointers do you have for non-profit directors making compensation decisions?

– Broc Romanek, CompensationStandards.com

Here is an interesting article from Arthur Kohn, Kathleen Emberger and Leah LaPorte Malone of Cleary Gottlieb about non-economic terms in executive employment agreements. In the article, theydescribe how careful attention to non-economic terms can often make a critical difference in the way that an executive departure unfolds.

– Broc Romanek, CompensationStandards.com

Here is an excerpt from this blog by recently deceased Prof. Larry Ribstein about this paper from Prof. Harwell Wells and Randy Thomas about how the courts may be the only way to rein in executive compensation:

The paper suggests a new approach to controlling executive compensation: the courts. The paper is partly historical, noting that courts have, in fact, been “surprisingly willing to second-guess decisions on executive compensation,” although after doing so they ultimately withdraw from the field to avoid becoming “entangled in setting pay.” The article says Delaware’s recent Gantler v. Stephens, which recognizes fiduciary duties of corporate officers, “opens the door for courts to monitor executive compensation by scrutinizing rigorously officers’ actions in negotiating their own compensation agreements.” Thomas & Wells also draw on Delaware holdings “that corporate officers are bound by their duty of loyalty to negotiate employment contracts in an arm’s-length, adversarial manner.”

Thomas & Wells suggest their “approach should be welcomed by the courts, which will not be required to determine whether compensation packages are fair or merited, but will instead be asked to engage in a familiar task, examining whether proper procedures were followed in setting compensation.” The abstract concludes:

This approach promises to break an impasse between the two major academic approaches to executive compensation. Advocates of “Board Capture” theory have long argued that senior executives so dominate their boards that they can effectively set their own pay. “Optimal contracting” theorists doubt this, contending that, given legal and economic constraints, executive compensation agreements are likely to be pretty good and benefit shareholders. The approach advocated here should, surprisingly, please both camps. To Board Capture theorists, it offers to cast light on pay negotiations they believe are largely a sham; to Optimal Contracting theorists, it offers a way to improve the already adequate negotiating environment.

– Broc Romanek, CompensationStandards.com

Check out this interesting paper from Profs. Fortin, Zhang, Subramaniam and Wang entitled “Incentive Alignment Through Shareholder Proposals on Management Compensation and its Bond Market Reaction: A Creditor’s Perspective.” Here is an excerpt:

“We contribute to the literature as well as the ongoing regulatory debates in several ways. First, we present ground-breaking evidence of bondholder reaction to shareholder proposals. Unfortunately, the realignment of manager and shareholder interests is not without consequences to a firm’s other stakeholders, as it is associated with a decrease in bond returns. Because there is a trade-off between shareholder-manager interest alignment and shareholder-bondholder conflict (DeFusco et al. 1990; Klein and Zur 2010; Ortiz-Molina 2007), our results suggest that boards of directors and regulators should adopt a balanced approach in dealing with activist shareholder campaigns, particularly those concerning top management incentive compensation.

The SEC was established in the 1930s with a mandate to protect investors in securities (both stock and bonds). To fulfill its duty towards public bondholders, the second SEC chairman William Douglas lobbied to pass the Trust Indenture Act of 1939 and established the bond trustee system in America. Recently, in response to the Dodd-Frank Act of 2010, the SEC released the new “Say-on-Pay” regulation in January 2011. From a bondholder’s perspective, the new SEC regulation might bring in unintended consequences, potentially compromising its duty towards bondholders.”